Chapter 1: Pragmatic Strategizing(Version January 8, 2012)
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In this chapter we will explore what I believe is an extremely pragmatic yet comprehensive management system. Business administration academia typically uses more complex systems to illustrate current and future challenges of an organization. My derivate is based on what is widely known as the "St Gallen Management Model", named after methodology originally developed by scholars of the Hochschule St. Gallen (HSG) in Switzerland. Because an organization is viewed from every possible angle, the St. Gallen methodology is probably the most compelling business model published. But due to its comprehensiveness, it is probably also the most complex model. Some publications go on for five hundred and more pages explaining why the system should work. Who would ever read that? I favor a different approach and from my executive experience I know that if something does not come across in an hour, it will never come accross. Over more than 15 years of lecturing the concept in senior management seminars I have found ways to simplify the message while retaining the core.
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Any structure will be more stable and sustainable if it is built on a solid foundation. Build it on sand, it will shift and fall, build it on rocks, it will be rock-solid. So, why are so many businesses neglecting the importance of the two main components of a foundation? The answer is very simple. The core purpose of the business shifts over time and the core competencies change along the way. But if either purpose or competencies get out of sync with another, problems are on the horizon. Look at department store icon Sears. Originally a mail-order business for watches and soon the first discounter of products for farmers, former railroad station agent Richard Sears and his business partner Alvah Roebuck changed the retail world of the late 19th Century. Clearly stated prices and a growing variety of products were the core competencies of Sears & Roebuck. Staying true to its competencies, Sears offered thousands of products on hundreds of pages of catalog. The business diversified adding major brands (Craftsman, Kenmore) and even insurance (Allstate), financial services (Dean Witter), Credit Cards (Discover), and real-estate (Coldwell Banker). By the late 1980's there was literally nothing you could not buy at Sears. The company, however, was far away from satisfying the core customer and market need: Great retail products at clearly stated prices. Consequently, in the 1990s, Sears started divesting non-retail entities and even stopped its catalog in favor of the website. Complexity of the business model had become uncontrollable, and in 2004 Kmart was able to acquire Sears. The new Sears Holdings Corporation became an even more ambiguous business model and only a minor part of its income today comes from retail operations.
Any business needs to be build on the foundation of a distinguished market need that it can satisfy with specific competencies. If the market need is attractive enough and the competencies are differentiated, a firm may be able to position itself uniquely enough to sustain. It then has a reason for being, or in other words, the market gives the business a "mission". Sears clearly had such in 1895.
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Someone who must have been locked up in a scholar's chamber for too long once said that senior executives should spend 80% of their time strategizing and 20% of their time supervising the business. This could not be farther from today's real world. Business today is so hyper-interactive that any senior executive needs to be everywhere at all times, and certainly needs to be involved in daily activities. One misstep and the virus of social media can destroy a company. One trend missed, and an icon goes down the tubes: As I write this paragraph, Kodak is preparing their filing for chapter 11 bankruptcy and is trying to sell off their vast intellectual property to save itself - selling the future to retain its leading role in celluloid film photography. There is only one place where you can find out what is really going on in the market place - and that is the market place itself. The senior leader needs to be capable of building a business on four symmetric pillars. The leading and guiding pillar for all other pillars is the market position. Sales! Sales! Sales! IBM is a prime example for a company that always has predicted what will sell next, and has lived its business model up to it. The sales-management gurus from Miller-Heiman predict that organizations where executives are systematically involved in closing deals have a 50% better performance than those firms where executives "strategize".
With sales up through the roof, an organization has a fair chance that financial stability, its second pillar, is solid and in sync. Financial stability is a simple measurement: Cash. Current disposable cash divided by operating expenses per day measures the lifeline of the company in days. I was widely ridiculed for this finding until a major tsunami hit Japan in 2010. Needless to say, only those Japanese companies with enough cash at hand made it through the disaster and the clean-up. I think you got the message: CASH!
Operative efficiency and continuous process improvements are measured in the third pillar. Again, this is something that is done at the shop-floor and not from remote. The employee on the line is almost always most qualified to suggest improvements to the line. When I was a consultant for process improvement in the early 1990's, listening to people down the line was all I needed to do to become one of the most effective consultant of my firm. Of course, I did not dress in a suit to do that - but when I sat down with a supervisor or specialist and listened to their needs and suggestions, I almost always found ideas no major consultancy would ever find in their structured analysis. There is no need to hire consultants for that. Just walk the line, shop-floor, or office suite twice a day and listen to your folks.
Finally and most importantly, the fourth pillar is people performance. Better motivated people perform better. Many companies treat people like a resource and get what they deserve for that. I have always tried to be a fair and open superior to my people. I have not always been rewarded for that, even made some real bad experiences, but I would never change my attitude that performance comes from people. Over time, every executive needs to build principles for people management and stick to those. All my disappointments in the past, including a most recent one, came when I violated two core principles: 1. Never hire a person when there is no clear position for him or her. 2. Never hire the person next in line, just because he, or she is just there - always conduct a full evaluation for every position.
If all four pillars are in sync, and they are built on a solid foundation, they can carry the future of your business. That is why it is so important not to belittle "operative business" as a chore for middle or lower management.
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The stability of the four pillars can be measured with the balanced scorecard. If the balance states that the pillars are level, one can start building on them. The first strategic layer is the current competitive position of an organization. What will the firm do 18, or 24 months from now and how will it accomplish that? Any organization is typically exposed to four competitive battlegrounds simultaneously and at any given time. These are the pro's and con's of the current competitive position.
1. Products and offerings are continuously improved, or renewed. Either you innovate, or your current or other competitors do. In this respect, what Michael Porter called the "five forces" (see chapter 3), are influencing any business. Should you have a better product, or an average product (at a better price)? 2. Bargaining power, or your commercial proposition. Typically that is the price-tag for your offerings minus your direct costs, i.e. your gross margin. The higher the margin, the better is your bargaining power, because you could - but do not have to - give margin to still cut a deal. Worst case is having an average product at a tight margin - there is no bargaining leverage left. 3. Marketing power, or marketing budget. Of course, when there is more cash, there tends to be more marketing power. Ideally, a firm wants to use marketing power most efficiently. Brand recognition and brand referrals are effective ways of doing so. A company with no brand recognition needs to spend a lot more efforts and money to convince customers to spend their budgets or impulse-purchases with them, than a company with a stellar brand. 4. Ability to influence demand, or loyalty. All marketing power is useless, if the customers are loyal to another brand. Dell and HP can market whatever they want, as long as Apple makes good computers, they will not be able to convince an Apple customer to get away from his or her Mac.
Exposure on the four battlefields is continuous, unless a company is able to break out and create a completely unique product or service. Something we call a "Blue Ocean" - more about that in a later chapter.
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Strengths and Weaknesses measure the current competitive position - the strategic directions and capabilities 18 to 24 months from today.
Strengths are internal characteristics where an organization outperforms their peers or the typical process performance. "This is where we are good at".
Weaknesses are internal characteristics where an organization has deficiencies compared to its peers, or processes where it underperforms. "This is what we need to improve".
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One of the most important decisions in the process of business management is what boundaries to expect, or to set for the goals of the organization. If the boundaries are set too narrow, the company will miss out on potential or opportunities. If the boundaries are set too vaguely or broadly, the organization will lack focus in the future and digress. The process is similar as discussed in the first slide, but this time the governing body and the stakeholders of a business determine what the boundaries should be. In case of a mom and pop or a start-up, this is simple: You decide. If the organization has a board of directors, this, and not oversight of compliance, is their most important task. Of course it is very tempting for an underperforming board of directors to look into the past and play internal investigators about management performance or behavior, instead of doing their job and contribute advancement of the company. I have more to say about this in later chapters.
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Once the potential horizon of the company is determined, it needs to set a goal. In traditional business administration terms, one would say that organization has to state a "vision" - what it intends to be three to five years from today. As we will see in later chapters, that vision-thing is problematic. If we look up the term vision in Wikipedia, this is what you get: Vision or visions may refer to:- Visual perception, interpreting what is seen - Visual system, the sensory of mechanism of eyesight - Vision (spirituality), inspirational experiences - Hallucination, vivid conscious perception in the absence of a stimulus So, where is the business term? Well, I suggest to replace the term vision with "Future Competitive Position", or just "Goal". Employees and stakeholders can refer much better to a goal, especially if we describe and draw a picture of how we "envision" our organization to look like in the future. The better and more accurate the picture, the easier it is for people use their imagination of how to get there - and that way to the goal would be the strategy. If everyone comes of with a strategy to get to the same goal, the organization will automatically be aligned. A thorough understanding of the market and its driving forces will help you to determine the proper goal. Sometimes the need for analysis may be very limited, because the business opportunities or upsides are obvious to the company. For many established firms, only long discussions and thorough reflections of all options will reveal what the best course may be. As an entrepreneur, I have learned to follow the golden rule of analysis: If I need a calculator to determine the value of a business idea, it is no business for me.
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Once the goal has been determined, it is important to once again review the environmental (or outside facts) analysis. Simply put, we need to find out what opportunities and threats the aspired future competitive position may trigger or get us into. The best way to handle this step is brainstorming with your management team. If you believe your team may be talking too much after you, engage them in virtual brainstorming, i.e. request a list of opportunities and threats by email from every individual, and ask them to add their conclusion for the strategy to the goal for each opportunity or threat. Then merge or bundle all the opportunities and threats received into clusters that make sense, and send them back to the team for an individual vote (more about that in a separate chapter about how to really tackle a SWOT). You want to end up with three to five generally accepted opportunities and threats.
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The SWOT how I suggest using it (and first published and copyrighted in 2004 in my book Total Customer Focus) is a virtual search engine for strategic options.
What I suggest here, most probably has nothing to do with what you may have experienced in moderated strategy workshops. Then, the team comes up with a list of strengths, weaknesses, opportunities and threats that go on a couple of flip charts and will never be revisited anymore. What a waste of time and potential.
In my methodology, a SWOT is used to generate options towards a goal. It is very important to have the goal in view to make a SWOT work for you. If your analysis of opportunities and threats is realistic, and your conclusion about the strengths and weaknesses is correct, you now should have confidence that your outside (OT) and inside (SW) inputs for the option generator are correct. Never forget, the SWOT only works, if it is directed towards a goal. An organization has four basic strategic options: 1. Optimistic - considering the opportunities and our strengths, nothing can go wrong and we push towards the goal at full speed. An attitude shown by very aggressive companies like Google. 2. Pessimistic - looking at the threats and our weaknesses, we have to make sure to get to the goal at all, and we have to constantly avoid the worst case, and if we do that, we will eventually crab towards our goal - slowly, but surely. This attitude should be predominant in the financial industry. Unfortunately, only a few prime companies adhere to this. The mutual fund company Vanguard is one of them. 3. Opportunistic - we have nothing to lose and therefore focus on opportunities while trying to keep our weaknesses under control. There are two situations in business where you can only win: Either the market is booming (telecom in the late 90's for example), or you have nothing to lose (like a a start-up biomedical). 4. Pessimistic - Andrew Grove from intel wrote a book entitled "Only the Paranoids are going to survive". Surely he focused on threats and strengths in his strategy patterns. So do most of the companies and this is therefore the most common option quadrant sought in a SWOT.
All it takes is to morphologically strategize in all four quadrants and if the inputs have been correct, the output should result in a feasible strategy towards the goal. Simple, and yes, it really works. More about the methodology and more tools for that later.
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A business plan is the logical and final step to follow. Once you have decided on the favored strategic option, all you need to do is to determine how the targeted strategic pillars should look like. So, you determine the respective deltas and plan how to move from current market, financial, process, and people performance to required future market, financial, process and people performance. No big deal, and neither is strategic management, if you follow the pragmatic approaches suggested in this web-book.
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